Contagion and interdependence of African Equity Markets

Abstract

Background This study examines the topic of contagion and interdependence of select African equity markets. Interdependence is measured over a five year period split into a full period, pre-crisis period and a crisis period. Also, contagion effects on five African equity markets as a result of the United States (US), sub-prime triggered financial crisis are ascertained. This study has two aims. First, it seeks to determine the strength of the relationship between equity markets in Africa. Secondly, it examines if any of the selected African markets suffered contagion effects as a result of perhaps the hardest hitting financial crisis of all time. Using data supplied by a financial research firm, I-net Bridge, data representing closing market indices over a six-year period (2004 to 2009) for six equity markets (including that of the US and five African equity markets) were collated and analysed for the purpose of the study. Results The results of this study are generally consistent with those of previous studies with respect to both research aims. Results show that African equity markets show very weak statistical relationship with each other. With the exception of South Africa and Egypt results also point to weak statistical relationship with the US's equity market. This is in line with previous research attempting to establish interdependence of African markets. With regard to the second research aim, three of the countries tested for contagion (Egypt, South Africa and Nigeria) were found to have suffered contagion effects as a result of the US- sub-prime triggered financial crisis. The other two, Botswana and Kenya, did not suffer contagion effects. These results are partly consistent with those of previous research. Past research often showed South Africa and Egypt to have suffered contagion effects as a result of financial events.